$865 billion in state pension fund losses are resulting in reduced benefits for new hires

Because state governments have accrued about $865.1 billion in state pension fund losses, new hires are ending up with reduced benefits. The losses not only exceed the $700 billion Troubled Asset Relief Program that Congress approved last year, but they are accompanied by $42 billion in state budget deficits. In a letter to US Treasury Secretary Henry Paulson, the mayors of Atlanta, Philadelphia, and Phoenix asked for help for their financially beleaguered cities and noted growing pension costs and investment deficits.

According to the Center for Retirement Research at Boston College, 109 state funds’ assets dropped 37% to $1.46 billion between October 2007 and December 2008. A 41% decline during this time period also occurred on the Standard & Poor’s 500 index of stocks.

For the 109 funds to be restored to their 2007 actuarial funding levels by 2010, the Boston College Center says the funds would require yearly returns of 52% on assets. These estimated projections could occur if there was a 5.7% increase in yearly liabilities and a $50 billion growth in assets from contributions beyond yearly payouts. While state funds do have enough money to pay for benefits for the foreseeable future, taxpayers will still have to make up this one-time loss-a proposition that is a hard sell.

A number of states are creating two-tiered systems that offer less benefits to new employees in order to reduce pension costs. For example, As of June 30, 2008, the largest fund in Kentucky for state workers had just 52% of the assets required to pay 117,000 members their present and future benefits. Now, Kentucky officials have established age 57 as the state’s minimum retirement age for workers hired after September 1. In order to receive full benefits, 30 years of service (rather than 27) are required. In New York, Governor David Patterson wants to increase the retirement age from 55 to 62 and decrease new workers’ benefits.

The stock market decline has also resulted in pension funds’ asset losses. Marsh & McLennan pension consulting unit Mercer LLC says that defined benefit funds dropped from $1.3 trillion in September 2008 to $1.1 trillion the following month. There are also state retirement systems that have experienced derivatives losses. Public data put together by Bloomberg in 2007 shows that public pension funds purchased over $500 million in so-called equity trenches of collateralized debt obligations.